Interest rates/ capital supply?

Question

I have a simple economics question.

There are 2 countries.

One country has higher interest rate than the other.

If the two country trades....which country is going to supply capital?

Answer 1

Capital is money.  Money migrates to the place where it will provide the highest return (interest rate).  Both countries will supply capital.  More capital will move to the country that offers the higher interest rate.

This is not ever true in the real world.  If Nigeria has the highest interest rate but there is war and famine and disorder, no one will send their money there.

Answer 2

For capital to be accumulated, and thus traded, businesses must be able to borrow money. This is because the firms will not actually see profit from that capital for a while.

If there are lower interest rates, the price of borrowing money is less. This means that firms can take on these capital producing projects because they are cheaper than under condidtions of high interest rates.

If a country has a higher interest rate, the firms in that country will not be able to invest money in long-term projects that require the accumulation of capital. They must get capital now so that they can make money sooner.

So, the country with a low interest rate is going to have comparitavly more capital goods than the other country, and will more than likely trade the capital goods to the countyr with the higher rate.

Now, it is important to realize that countries do not trade. Indivdual firms in countries trade. The way that current economic theory sees it is really silly. So, it is entirly likely that a firm in the high interest rate country gets loans with an even lower interest rate, and therefor has more capital goods than a firm in the high interest rate country.